UAA - Under Armour: Bargain Bin

2023-03-07 15:23:12 ET

Summary

• Under Armour, Inc. has traded down since reporting a solid FQ3'23 earnings report.
• The athletic apparel company still forecasts producing solid earnings despite a 425 basis point hit to gross margins.
• Under Armour stock is cheap based on earnings rebounding in FY24 as the promotional environment ends.

Some stocks just never seem to get a break, and Under Armour, Inc. ( UA , UAA ) falls into this category now. The athletic apparel company handled the inventory issue as best as possible throughout the covid supply chain issues, yet the stock never got a benefit during the period. My investment thesis remains ultra-Bullish on the stock following the dip back below $10.

No Inventory Problem Here

Sometimes, the market just doesn't want to listen. Under Armour faced this scenario following the FQ3'23 earnings report , where the company outlined higher inventories as a goal. The market interpreted the high inventories as problematic, yet the athletic apparel company was clear inventory levels are still below pre-covid levels while revenues are at record levels.

Under Armour had correctly cancelled orders during supply chain backups to prevent the company from facing an excess inventory scenario. Despite being too lean for the holidays, the company still faced pricing pressures due to competitors such as Nike, Inc. ( NKE ) having vastly too much inventory.

Under Armour is producing record sales, but the company had an inventory level ending 2022 of only $1.2 billion. Under Armour had higher inventories back in 2019 when sales were lower.

The stock is hitting new lows on fears following commentary the promotional environment is expected to continue into 2023. The selloff is bizarre because management was clear the increase in inventory was intentional to recapture lost sales from 2022 when inventory was too lean.

Per FQ3'23 earnings call , Interim CEO Colin Brown said this about inventory levels:

From an inventory perspective, levels continued to be elevated across our sector. At the end of the third quarter, our inventory was up 50% to $1.2 billion. As a reminder, though, our inventory was quite lean in fiscal 2021 due to our constrained strategy and supply chain disruptions. So a large part of this increase and the increase over the next few quarters is simply normalizing to levels to us being a close to a $6 billion brand. At the end of fiscal 2023, we expect a similar growth rate of about 50%. But again, to contextualize this, this growth rate is up an $800 million basis [ph] from the prior year, which was similar to 2015 when we were a $4 billion business.

The other very odd part regarding inventory levels is that DICK's Sporting Goods, Inc. ( DKS ) reported a similar rise in inventory levels when reporting FQ4'23 results, but the stock soared to all-time highs. The athletic apparel department store reported inventory jumped to $2.83 billion , up from $2.30 billion a year ago in a positive sign for the sector.

Big Profits Ahead

Under Armour has faced a tough environment with higher promotional activity and foreign currency impacts. The company still reported a big $0.07 beat and reported a $0.16 EPS in FQ3'23. In addition, Under Armour guided up the EPS target for the year to $0.54, up from a prior estimate of $0.46.

The odd part of the stock trading back towards the lows is the EPS beat for the quarter and guide up. Dick's had a similar EPS beat and guide up, leading to the stock soaring 10% and hitting new highs above $145.

The really odd part about the Under Armour story is the analyst forecasts for EPS estimates. Prior to the tough promotional environment in the last year, analysts forecast EPS targets in the $0.80 to $1.00 range in the years ahead.

The company didn't say anything on the FQ3'23 earnings call to suggest the previous earnings scenario wasn't still in place. CFO Dave Bergman did mention a promotional environment lasting longer into 2023 than originally forecast, as follows:

Before I close out, even though we aren't providing a fiscal 2024 outlook until our Q4 call in May, we are anticipating the macroeconomic backdrop to stay uneven in calendar 2023 with elevated sector-wide inventories that could result in ongoing promotions lasting longer than previously expected.

The stock market ran with these comments on a promotional environment lasting longer than expected, but the company should enter FY24 in April with a better inventory position in the sector. Under Armour forecast a nearly 425 basis point impact to gross margins for FY23, and this hit should start reversing in FY24.

On a return to gross margins of 50% similar to the 49.6% achieved in the prior fiscal year, Under Armour already forecast an annual EPS of nearly $0.70 for FY23 when the gross margin hit was only forecast at between 150 and 200 basis points. In addition, the athletic apparel retailer should grow revenues beyond those projected FY23 levels during the FY24 period.

The company only forecasts producing a 5% operating margin in FY23 and a 425 basis point improvement in gross margins could work to nearly double the operating margin going forward. A big question exists on whether the full recovery will take place in FY24, but a recovery should happen after this promotional environment ends whether in March, April, May or a few months later.

Takeaway

The key investor takeaway is that Under Armour, Inc. is in the bargain bin trading below $10. The athletic apparel company should soon be back on track towards the $0.80 to $1 EPS targets prior to the economic weakness and promotional activity. Ultimately, Under Armour, Inc. should follow Dick's Sporting Goods higher.

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